9/15/2008 @ 4:15AM

Deja Vu: Is Wall Street's Crisis Turning Japanese?

The day the Japanese stock market cracked in December 1989, I was having lunch in Tokyo with a senior executive from Nippon Mortgage. The company’s specialized in extending 99-year home loans. With housing prices in the stratosphere, the idea was that the grandkids of Nippon Mortgage’s customers would pay them off.

It was not long after the stock market started its tumble that Japanese real estate followed suit. Within a few months, Nippon Mortgage was bankrupt, and my lunch host was out of a job.

In retrospect, 99-year loans seem absurd. But, with a lot less hindsight, they look no sillier than many of the loans extended, underwritten, securitized, sold and bought by what were supposedly the best minds on Wall Street–undocumented mortgages, mortgages with interest but no principal payments, those for more than the value of properties and those to people with toxic credit ratings.

Having reported on Japan’s rise and collapse in the late 1980s and early 1990s, I had witnessed firsthand the damage a major real estate meltdown can wreak. But as the U.S. downturn unfolded last year, I felt comfortable Wall Street would not suffer a fate similar to Tokyo’s. Japan, after all, had a relatively primitive financial system that relied heavily on a handful of hidebound commercial banks and brokerages.

Japan was almost completely lacking in U.S.-style self-correcting mechanisms–namely, the vulture investors, hedge funds, buyout giants and others who wait decades for a chance like this to pounce on distressed assets and help the entire system snap back.

Such investors are important, and in the end they may bring the U.S. financial system salvation. But for now they are about as useful in limiting damage from the current financial tsunami as Galveston’s seawall was in protecting the city from Hurricane Ike.

Meantime, the United States is starting to look as flat-footed about how to deal with its crisis as I remember Japan looking way back when. Then, as now, the government orchestrated one grand rescue after another. Stock markets dutifully took off, only to fall back within days as reality sank in and investors realized the real estate collapse continued unabated, along with the unfolding carnage.

As Japan’s meltdown dragged on, two of its four iconic investment banks went ‘poof!’ Yamaichi Securities declared bankruptcy in 1997. Ironically, its assets were bought by
Merrill Lynch
, which tried for a time to use them to build a retail brokerage network before giving up.

Nikko Securities came close to bankruptcy, too, and ultimately ended up in the hands of foreigners–Sandy Weill and
Citigroup
.

Many Japanese commercial banks failed or were forced to sell themselves as well. Mortgage lenders blew up right and left. In the end, the landscape was changed forever. The heady times, and the false prosperity they had wrought, never returned. In their place is a more sober and ultimately more stable financial system–even if it is one that is also less freewheeling and fun.